My most surprising discovery: the overwhelming importance in business of an unseen force that we might call “the institutional imperative.” In business school, I was given no hint of the imperative’s existence and I did not intuitively understand it when I entered the business world. I thought then that decent, intelligent, and experienced managers would automatically make rational business decisions. But I learned over time that isn’t so. Instead, rationality frequently wilts when the institutional imperative comes into play.
For example: (1) As if governed by Newton’s First Law of Motion, an institution will resist any change in its current direction; (2) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.
Institutional dynamics, not venality or stupidity, set businesses on these courses, which are too often misguided. After making some expensive mistakes because I ignored the power of the imperative, I have tried to organize and manage Berkshire in ways that minimize its influence. Furthermore, Charlie and I have attempted to concentrate our investments in companies that appear alert to the problem.–Warren Buffett
Coors Case Study Analysis
My short write-up: http://www.scribd.com/doc/80155636/Coors-Case-Study
But readers’ comments are even better. These contributors posted here: http://wp.me/s1PgpH-1302. I reposted below. Good work.
Dave
- These were the numbers that jumped out at me:
In the 3 largest areas that they operated, Coors had almost 50% market share in 1977. By 1985 they had only 14% in that region, however they expanded to almost all the states and sold 16% more barrels. - Also in 1977 Coors had a 20% operating margin, far ahead of any competitor. By 1985 it was down to 8%. Marketing expenses were the cause of this, jumping from 2.6% of revenues to 15%, far more than any major competitor.
- While Coors was expanding, all of their competitors (mostly AB and Miller) were taking a major chunk of their market share in the markets they previously dominated.
- It seems that the marketing expenses are what killed Coors’ margins. If Coors expanded its local market share in 1977 instead of jumping around their marketing expenses would’ve been much lower per barrel than all of their competitors.
Herman | February 1, 2012 at 8:12 am | Reply | Edit
I fully agree with Dave’s analysis. Although there was advertising expenses were on an industry-wide rise since the late 70s (probably driven by PM’s takeover of Miller), Coors’ advertising expenses made up 15% of sales vs. an industry average of 10%. On a per-barrel basis, Coors spent $11/barrel on advertising in ’85, whilst AB spent $7/barrel.
Reason for these high expenses was that the advertising expenses are primarily regional, and Coors had lost market share in its heart land (Mountain, Pacific, WSC) – 25% in ’77 to 15% in ’85 against AB and Miller, and had insufficient foothold in other states (in all non-heartland areas except for NE Coors had <10% market share).
A crucial mistake Coors management made was to allow Miller and AB to fill the capacity gap in its heart-land (10 states west of Colorado), thereby losing market share and thereby weakening the EoS it had. It seems like Coors’ management was focused on its nation-wide roll and lost sight of defending its local market share. EXCELLENT POINT.
It seems like AB enjoys EoS now.
It’s easy to play Monday morning quarterback, but if I were in Coors shoes, and saw the decline in market share I would have taken the following steps:
Step 1) Map out profitability per state to understand which states create a drag on Coors margin. My guess would be that this would be a combination of distance from its brewery and low ( <10%) market share) but this would require some further analysis.
Step 2) Cut fat – there seems to be fat everywhere in the value chain, which translates into lower margins. By cutting out this fat, more cash can be generated. Examples of potential areas of fat:
a) Coors strategy of maintaining full integration of its supply chain (e.g. owning its own transport company, generating its own power, etc). This may not be the best strategy in a mature market like beer. Other service-providers may have an cost-advantage, e.g. in transportation. Coors own transport company led to 10%-15% higher trucking costs thanks to low back haulage compared to independent transporters.
b) Maintaining so many brands – Coors ran 4 different super premium brands vs. an industry average of 1. Even though super premium brands generated cash to fund advertising campaigns, the costs were pretty high ($20 – $ 35 Mln launch costs, $10 M annually advertising maintenance costs, and costs associated with running so different many packages on its production lines).
Step 3) Abandon the ‘bleeder’ states, and focus on the strong states (its heartland). Defend market share aggressively by cutting prices, using the excess cash generated by having cut the fat as laid out in step 2 .
- Dave | February 1, 2012 at 10:16 am
I of course completely agree with you but do you have any insight on why they may have pursued the strategy that they did at the time?
Coors Case Study that is Not Helpful
There is interesting information and background here on the beer industry, but this 64-page reports lacks logic and analysis. On what basis does the author suggest that Coors go international? That advice is equivalent to giving a drowning man a drink from a firehose. Coors would only be worsening its position—further growth without profit. The readers above who contributed their analysis in a few paragraphs grasped the essence of Coors errors. Don’t be fooled by fancy terms like SWOT analysis–get at the nub of the problem like Hannibal Lechter http://richraths.com/files/CoorsCaseStudyAnalysis2004.pdf